The Merrill Lynch UK Absolute Alpha Fund seeks to achieve a positive absolute return for investors and, as such, the Fund will not be managed against any UK equity index.
The Fund endured a difficult month, returning -1.6% as a powerful reversal of the themes that dominated the last 12 months brought considerable volatility. The continued decline in oil prices encouraged investors to take a much-more benign view on inflation and hence the likely direction of interest rate policy in the UK despite a sharp fall in the value of sterling that is likely to have material consequences for import prices.The Short book was the biggest drag on performance, as shares exposed to consumer discretionary expenditure rallied significantly. This appears difficult to justify on fundamentals alone, but equally we must be pragmatic about the observed volatility of companies with thin equity bases and how the process of de-leveraging can be a meaningful determinant of price moves in the short-term.In such an environment it is important that we continue to express our views, but in such a way that will minimize potential losses. Let us be clear, the outlook for the UK economy and consumption trends in particular remain challenging. Credit markets continue to be dysfunctional: access to capital for both corporates and individuals is limited and at prices that many consider prohibitive.The impact of the movement in sterling should not be underestimated: either prices must rise, which would have potentially damaging implications for inflation, or profit margins will be squeezed as input costs rise. We have moved to reduce the portfolio's gross exposure further and continue to run with a very modest net position in order to reflect higher levels of volatility and increased uncertainty.It remains one of the great strengths of this product that the level of investment need only match the strength of our conviction.
198.03p
